Interactive Intelligence Reports Record Second Quarter Operating Results; Company Posts 23 Percent Revenue Increase

Interactive Intelligence Inc. (Nasdaq:ININ), a global developer of business communications software, today reported record operating results for its second quarter ending June 30, 2006.

Revenues in the second quarter of 2006 were $19.3 million, up 23 percent from $15.6 million in the second quarter of 2005, and up 7 percent compared to $17.9 million for the first quarter of 2006. Net income for the second quarter, calculated in accordance with U.S. generally accepted accounting principles (GAAP), was $962,000 with diluted earnings per share (EPS) of $0.05, compared to net income of $290,000 and EPS of $0.02 in the second quarter of 2005.

Excluding stock-based compensation expense, 2006 second quarter net income was $1.6 million with EPS of $0.09. A reconciliation of GAAP operating results to non-GAAP results, which exclude the recording of stock-based compensation expense for employee stock options, is included in an attached schedule.

Revenues for the six months ended June 30, 2006 were $37.2 million, up 23 percent from $30.2 million in the same period in 2005. Net income for the six months ended June 30, 2006, calculated in accordance with GAAP, was $2.0 million with EPS of $0.11, compared to $315,000 with EPS of $0.02 in the first half of 2005.

Excluding stock-based compensation expense, net income for the six months ended June 30, 2006 was $3.1 million, with EPS of $0.18. A reconciliation of GAAP operating results to non-GAAP results is included in an attached schedule.

Cash and short-term investments as of June 30, 2006 totaled $20.2 million, up from $15.1 million on Dec. 31, 2005, and cash flow from operating activities in the first six months of 2006 was $4.3 million, compared to the use of $63,000 from operations in the same period last year.

"These results mark not only a new quarterly revenue record, but our third consecutive quarter of more than 20 percent revenue growth and our tenth consecutive quarter of profitability," said Interactive Intelligence CEO, Dr. Donald E. Brown. "Our operating margin was significantly higher than the same quarter last year. We believe we have good momentum moving into the second half of 2006 with exciting new product releases, innovative branding and lead generation campaigns, and a strong sales pipeline."

New and add-on customer orders received in the second quarter included Bass Pro Shops, Brandhouse Beverages PTY Ltd. (a joint venture between Diageo and Heineken), Celtel International, Gauteng Shared Services Centre, ITV Direct, LTD, Mondial Assistance Netherlands, National FFA Organization, Shiseido America, SurfControl, Inc., XLNT Marketing, and others.

The company made two significant product announcements during the quarter. In May the company introduced a new workforce management software application, Interaction Optimizer(TM). According to industry analyst firm Yankee Group, the market for workforce management currently exceeds $200 million. "This is a strategic move for Interactive Intelligence with great potential," said Yankee Group senior analyst, Ken Landoline. "Many smaller and mid-sized contact centers have never made the investment because of the perceived complexity of integrating workforce management with the ACD. Interaction Optimizer offers advanced features such as multimedia support and makes the deployment very easy for customers."

In June Interactive Intelligence released an enhanced version of its multi-site call routing software essential for companies experiencing increased demand for cost-effective disaster recovery strategies. According to a recent Gartner report, "some high visibility disasters (for example, Hurricane Katrina) and the continued pressure of compliance and regulation have increased the pressure on mid-market CIOs to find a way to make their businesses more resilient" (Midsize Businesses Spending In New Technology Areas, James A. Browning, July 13, 2006).

Interactive Intelligence also continued to receive recognition as a leader in the voice over IP market. In addition to certifying the company's IP-based contact center automation software, independent test lab, Miercom, praised this solution in a June Business Communications Review article, saying, "In Interactive's case, SIP is not only the de facto open standard for VoIP, but the latest enabler of new, productivity-enhancing communications applications."

Second quarter awards included Network Computing magazine's Well-Connected Award for the company's unified communications and messaging software. In addition, the company was ranked for the third year in a row among Network World magazine's top 200 network companies in North America with a compound annual growth rate from 2001 to 2005 exceeding that of its three largest competitors.

Interactive Intelligence will host a conference call today at 4:30 p.m. EDT, featuring Dr. Donald E. Brown and the company's chief financial officer, Stephen R. Head. There will be a live Q&A session following opening remarks. The teleconference is expected to last approximately 45 minutes.

To access the teleconference, please dial 1 800.633.8414 at least five minutes prior to the start of the call. Ask for the teleconference by the following name: "Interactive Intelligence second quarter earnings call."

The teleconference will also be broadcast live on the company's investor relations' page at http://www.inin.com/investors. An archive of the teleconference will be posted following the call.

About Interactive Intelligence

Interactive Intelligence Inc. (Nasdaq:ININ) offers business communications software solutions for contact center automation, enterprise IP telephony, unified communications, and self-service automation. The company was founded in 1994 and has more than 2,000 customers worldwide. Recent awards include the 2006 Network World 200, CRM Magazine's 2006 Rising Star Excellence Award, Network Computing Magazine's 2006 Well-Connected Award, Software Magazine's 2005 Top 500 Global Software and Services Companies, Miercom's 2005 Best Integrated Multimedia IP Contact Center product award, and Frost & Sullivan's 2005 Excellence in Technology of the Year Award. Interactive Intelligence employs more than 400 people and is headquartered in Indianapolis. The company has 12 offices throughout North America, Europe and Asia Pacific. Interactive Intelligence can be reached at +1 317.872.3000 or info@inin.com; on the Net: http://www.inin.com.

This release contains certain forward-looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: rapid technological changes in the industry; the company's ability to maintain profitability, to manage successfully its growth and increasingly complex third party relationships, to maintain successful relationships with its current and any new resellers, to maintain and improve its current products and to develop new products and to protect its proprietary rights adequately; and other factors described in the company's SEC filings, including the company's latest annual report on Form 10-K and its quarterly reports on Form 10-Q.

This release includes non-GAAP amounts as shown in the Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements of Operations, which excludes stock-based compensation expense for employee stock options. This non-GAAP reconciliation includes non-GAAP line items, including net income and per share data. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. As Interactive Intelligence begins to apply FAS 123R, it believes that it is useful to investors to understand how the compensation expense associated with the application of FAS 123R is reflected on its statement of operations. Interactive Intelligence's management believes that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to management and investors regarding financial and business trends related to the company's results of operations. Interactive Intelligence's management further believes the adjustment used in calculating non-GAAP results are based on specific, identified charges that impact different line items in the statements of operations, and that it is useful to investors to know how these specific line items in the statements of operations are affected. Further, Interactive Intelligence believes that these non-GAAP measures improve management's and investors' ability to compare the company's financial performance with the prior period because the prior period did not include stock-based compensation expense related to employee stock options. In addition, Interactive Intelligence's management uses these non-GAAP results to compare its performance to its competitors in the software industry. Because the stock-based compensation expense can vary significantly between companies, it is useful to compare results without these costs. For its internal budgets, Interactive Intelligence's management uses financial statements that do not include stock-based compensation expense related to employee stock options.

Interactive Intelligence Inc. is the owner of the marks INTERACTIVE INTELLIGENCE, its associated LOGO and numerous other marks. All other trademarks mentioned in this document are the property of their respective owners.

                    Interactive Intelligence, Inc.
                Condensed Consolidated Balance Sheets
                            (in thousands)

                                               June 30,   December 31,
                                                 2006         2005
                                              ----------- ------------
                                              (unaudited)
Assets
Current assets:
   Cash and cash equivalents                     $13,853      $11,551
   Short-term investments                          6,316        3,576
   Accounts receivable, net                       15,213       14,927
   Prepaid expenses                                4,251        2,939
   Other current assets                            1,169          789
                                              ----------- ------------
     Total current assets                         40,802       33,782
Property and equipment, net                        4,177        4,013
Other assets, net                                    634          603
                                              ----------- ------------
Total assets                                     $45,613      $38,398
                                              =========== ============

Liabilities and Shareholders' Equity
Current liabilities:
   Accounts payable and accrued liabilities       $6,528       $6,676
   Accrued compensation and related expenses       2,293        1,906
   Deferred product revenues                       6,118        5,195
   Deferred services revenues                     17,969       16,828
                                              ----------- ------------
     Total current liabilities                    32,908       30,605
                                              ----------- ------------
Shareholders' equity:
   Preferred stock                                     -            -
   Common stock                                      165          161
   Additional paid-in-capital                     68,760       65,826
   Accumulated deficit                           (56,220)     (58,194)
                                              ----------- ------------
     Total shareholders' equity                   12,705        7,793
                                              ----------- ------------
Total liabilities and shareholders' equity       $45,613      $38,398
                                              =========== ============


                    Interactive Intelligence, Inc.
     Condensed Consolidated Statements of Operations (unaudited)
               (in thousands, except per share amounts)

                                  Three months ended Six months ended
                                       June 30,          June 30,
                                  ------------------ -----------------
                                     2006     2005     2006     2005
                                  ---------- ------- -------- --------

Revenues:
   Product                           $9,586  $8,596  $18,447  $16,482
   Services                           9,667   7,026   18,736   13,733
                                  ---------- ------- -------- --------
       Total revenues                19,253  15,622   37,183   30,215
                                  ---------- ------- -------- --------
Cost of revenues:
   Product                            2,033   1,108    3,366    1,874
   Services                           3,315   2,703    6,459    5,410
                                  ---------- ------- -------- --------
       Total cost of revenues         5,348   3,811    9,825    7,284
                                  ---------- ------- -------- --------
Gross profit                         13,905  11,811   27,358   22,931
                                  ---------- ------- -------- --------
Operating expenses:
   Sales and marketing                6,855   6,146   13,734   12,000
   Research and development           3,221   3,212    6,262    6,407
   General and administrative         2,833   2,035    5,367    4,056
                                  ---------- ------- -------- --------
       Total operating expenses      12,909  11,393   25,363   22,463
                                  ---------- ------- -------- --------
Operating income                        996     418    1,995      468
Other income:
   Interest income, net                 116      62      220      113
   Other expense, net                   (12)   (136)     (64)    (182)
                                  ---------- ------- -------- --------
Total other income (expense)            104     (74)     156      (69)
                                  ---------- ------- -------- --------
Income before income taxes            1,100     344    2,151      399
Income taxes                            138      54      177       84
                                  ---------- ------- -------- --------
Net income                             $962    $290   $1,974     $315
                                  ========== ======= ======== ========

Net income per share:
Basic                                 $0.06   $0.02    $0.12    $0.02
                                  ========== ======= ======== ========
Diluted                               $0.05   $0.02    $0.11    $0.02
                                  ========== ======= ======== ========

Shares used to compute net income
 per share:
Basic                                16,433  16,015   16,343   15,986
Diluted                              18,070  16,685   17,652   16,608

Stock-based compensation expense for employee stock
 options by category:
   Cost of services                     $39      $-      $78       $-
   Sales and marketing                  264       -      549        -
   Research and development              61       -      110        -
   General and administrative           304       -      420        -
                                  ---------- ------- -------- --------
                                       $668      $-   $1,157       $-
                                  ========== ======= ======== ========


                    Interactive Intelligence, Inc.
Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements
                       of Operations (unaudited)
               (in thousands, except per share amounts)

                                         Three months ended
                               ---------------------------------------
                                       June 30, 2006          June 30,
                               ------------------------------ --------
                                 GAAP   Adjustments  Non-GAAP    2005
                               -------- ------------ -------- --------

Revenues:
  Product                       $9,586           $-   $9,586   $8,596
  Services                       9,667            -    9,667    7,026
                               -------- ------------ -------- --------
        Total revenues          19,253            -   19,253   15,622
                               -------- ------------ -------- --------
Cost of revenues:
  Product                        2,033            -    2,033    1,108
  Services                       3,315          (39)   3,276    2,703
                               -------- ------------ -------- --------
        Total cost of revenues   5,348          (39)   5,309    3,811
                               -------- ------------ -------- --------
Gross profit                    13,905           39   13,944   11,811
                               -------- ------------ -------- --------
Operating expenses:
  Sales and marketing            6,855         (264)   6,591    6,146
  Research and development       3,221          (61)   3,160    3,212
  General and administrative     2,833         (304)   2,529    2,035
                               -------- ------------ -------- --------
        Total operating
         expenses               12,909         (629)  12,280   11,393
                               -------- ------------ -------- --------
Operating income                   996          668    1,664      418
Other income:
  Interest income, net             116            -      116       62
  Other expense, net               (12)           -      (12)    (136)
                               -------- ------------ -------- --------
Total other income (expense)       104            -      104      (74)
                               -------- ------------ -------- --------
Income before income taxes       1,100          668    1,768      344
Income taxes                       138            -      138       54
                               -------- ------------ -------- --------
Net income                        $962         $668   $1,630     $290
                               ======== ============ ======== ========

Net income per share:
Basic                            $0.06        $0.04    $0.10    $0.02
                               ======== ============ ======== ========
Diluted                          $0.05        $0.04    $0.09    $0.02
                               ======== ============ ======== ========

Shares used to compute net
 income per share:
Basic                           16,433            -   16,433   16,015
Diluted                         18,070            -   18,070   16,685


                    Interactive Intelligence, Inc.
Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements
                       of Operations (unaudited)
               (in thousands, except per share amounts)

                                           Six months ended
                                --------------------------------------
                                        June 30, 2006         June 30,
                                ----------------------------- --------
                                  GAAP   Adjustments Non-GAAP    2005
                                -------- ----------- -------- --------

Revenues:
  Product                       $18,447          $-  $18,447  $16,482
  Services                       18,736           -   18,736   13,733
                                -------- ----------- -------- --------
        Total revenues           37,183           -   37,183   30,215
                                -------- ----------- -------- --------
Cost of revenues:
  Product                         3,366           -    3,366    1,874
  Services                        6,459         (78)   6,381    5,410
                                -------- ----------- -------- --------
        Total cost of revenues    9,825         (78)   9,747    7,284
                                -------- ----------- -------- --------
Gross profit                     27,358          78   27,436   22,931
                                -------- ----------- -------- --------
Operating expenses:
  Sales and marketing            13,734        (549)  13,185   12,000
  Research and development        6,262        (110)   6,152    6,407
  General and administrative      5,367        (420)   4,947    4,056
                                -------- ----------- -------- --------
        Total operating expenses 25,363      (1,079)  24,284   22,463
                                -------- ----------- -------- --------
Operating income                  1,995       1,157    3,152      468
Other income:
  Interest income, net              220           -      220      113
  Other expense, net                (64)          -      (64)    (182)
                                -------- ----------- -------- --------
Total other income (expense)        156           -      156      (69)
                                -------- ----------- -------- --------
Income before income taxes        2,151       1,157    3,308      399
Income taxes                        177           -      177       84
                                -------- ----------- -------- --------
Net income                       $1,974      $1,157   $3,131     $315
                                ======== =========== ======== ========

Net income per share:
Basic                             $0.12       $0.07    $0.19    $0.02
                                ======== =========== ======== ========
Diluted                           $0.11       $0.07    $0.18    $0.02
                                ======== =========== ======== ========

Shares used to compute net
 income per share:
Basic                            16,343           -   16,343   15,986
Diluted                          17,652           -   17,652   16,608


Note: The Company's Consolidated Statement of Operations prior to 2006
did not include stock-based compensation expense related to employee
stock options because the Company did not apply FAS 123R prior to
2006. The Company adopted FAS 123R in 2006 on a modified prospective
basis as permitted by the standard.


                    Interactive Intelligence, Inc.
          Consolidated Statements of Cash Flows (unaudited)
                            (in thousands)

                                                     Six months ended
                                                         June 30,
                                                    ------------------
                                                      2006      2005
                                                    --------  --------

Operating activities:
Net income                                           $1,974      $315
Adjustments to reconcile net income to net cash
 provided (used) by operating activities:
   Depreciation                                         867     1,143
   Stock-based compensation expense                   1,166        61
   Loss on disposal of fixed assets                       4         -
   Changes in operating assets and liabilities:
      Accounts receivable                              (286)   (2,959)
      Prepaid expenses                               (1,312)      (11)
      Other current assets                             (380)      147
      Other assets                                      (31)      (36)
      Accounts payable and accrued liabilities         (148)     (938)
      Accrued compensation and related expenses         387       190
      Deferred product revenues                         923        (7)
      Deferred services revenues                      1,141     2,032
                                                    --------  --------
Net cash provided (used) by operating activities      4,305       (63)
                                                    --------  --------

Investing activities:
   Purchases of property and equipment               (1,035)   (1,227)
   Purchases of available-for-sale investments       (6,829)        -
   Sale of available-for-sale investments             4,089         -
                                                    --------  --------
Net cash used by investing activities                (3,775)   (1,227)
                                                    --------  --------

Financing activities:
   Proceeds from issuance of common stock                96       111
   Proceeds from stock options exercised              1,676       215
                                                    --------  --------
Net cash provided by financing activities             1,772       326
                                                    --------  --------

Net increase (decrease) in cash and cash equivalents  2,302      (964)

Cash and cash equivalents, beginning of period       11,551    14,603

                                                    --------  --------
Cash and cash equivalents, end of period            $13,853   $13,639
                                                    ========  ========

Cash paid for interest                                   $7        $8
Cash paid for taxes                                     159       180

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